4 Swire Pacific Annual Report 009 World’s Best Voted “Airline of the Year 009” in Skytrax passenger survey, Cathay Pacific Airways, flying to over 00 destinations worldwide, delivers a quality of product and service that customers appreciate. Swire Pacific Annual Report 009 5 Review of Operations Aviation Division The Aviation Division principally comprises significant investments in the Cathay Pacific group, the Hong Kong Aircraft Engineering (“HAECO”) group and Hong Kong Air Cargo Terminals (“Hactl”). The Cathay Pacific group includes Cathay Pacific Airways (“Cathay Pacific”), its wholly-owned subsidiary Hong Kong Dragon Airlines (“Dragonair”), its 60% owned subsidiary AHK Air Hong Kong, and an associate interest in Air China. In addition, Cathay Pacific has interests in a number of companies providing aviation-related services including flight catering, ramp and cargo handling and laundry services. Cathay Pacific and HAECO are listed on the Hong Kong Stock Exchange. 2009 008 HK$M HK$M Share of post-tax profits/(losses) from associated companies Cathay Pacific group* 1,349 (3,607) Hong Kong Aircraft Engineering group 314 505 Hong Kong Air Cargo Terminals 234 74 1,897 (,88) Attributable profit/(loss) 1,821 (,922) Turnover of these associated companies at entity level is: 2009 008 HK$M HK$M Cathay Pacific group* 66,978 86,563 Hong Kong Aircraft Engineering group 4,045 4,90 Hong Kong Air Cargo Terminals 2,676 ,886 Swire Pacific’s Aviation Division includes the following associated companies: Shareholding at 31st December 2009 Direct or by By Cathay Swire Pacific Swire Aviation** Pacific group Total effective interest Cathay Pacific group 4.0% – 4.0% 4.0% Hong Kong Aircraft Engineering Company 46.0% 5.0% 6.0% 5.3% Hong Kong Air Cargo Terminals*** 30.0% 0.0% 40.0% 0.0% * Figures for the comparative period have been restated following the adoption of HK(IFRIC)-Int 3 (Customer Loyalty Programmes). Refer to note (a) to the accounts for further details. The share of profit attributable to Cathay Pacific’s holding in HAECO has been included in the attributable figures for that company. ** Swire Aviation, which holds a 30% interest in Hactl, is a 66.7% held subsidiary company of Swire Pacific. *** Cathay Pacific accounts for its shareholding in Hactl as an investment interest and consequently the Swire Pacific Group does not include this holding in the interest shown above. 6 Swire Pacific Annual Report 009 Cathay Pacific and Dragonair Key Operating Highlights 2009 008 (Restated) Change Available tonne kilometres (“ATK”)* Million 22,249 4,40 -8.9% Available seat kilometres (“ASK”)* Million 111,167 115,478 -3.7% Revenue passenger kilometres (“RPK”)* Million 89,440 90,975 -1.7% Revenue passengers carried ’000 24,558 4,959 -1.6% Passenger load factor* % 80.5 78.8 +1.7%pt Passenger yield* HK¢ 51.1 63.5 -19.5% Cargo and mail carried Tonnes ’000 1,528 ,645 -7.1% Cargo and mail load factor* % 70.8 65.9 +4.9%pt Cargo and mail yield* HK$ 1.86 .54 -26.8% Cost per ATK* HK$ 2.76 3.80 -27.4% Cost per ATK without fuel HK$ 2.00 .89 +5.8% Aircraft utilisation Hours per day 11.2 11.5 -2.6% On-time performance* % 86.8 8.4 +5.4%pt * Refer to Glossary on page 9 for definition. 2009 Overview The improved results principally reflect mark-to-market gains in respect of fuel hedging contracts and the profit on disposal The Aviation Division reported an attributable profit of of a .45% stake in HAECO to Swire Pacific. The profit HK$,8 million in 009, compared to a loss of HK$,9 on disposal of the stake in HAECO has been eliminated on million in 008. This reflects improved results in the Cathay consolidation in the Swire Pacific Group accounts. These gains Pacific group, which more than offset reduced profits in the (and some recovery in operating profit in the latter part of HAECO group and Hactl. the year) more than offset the adverse effect on results of the severe economic downturn during much of 009. As part of a realignment of the principal shareholdings in Cathay Pacific, Swire Pacific acquired an additional % Fuel prices in the first half of 009 were significantly lower shareholding in Cathay Pacific from CITIC Pacific in September than in 008. However, they started to rise again in the middle 009 for a consideration of HK$,03 million. As a result, of 009. This rise was reflected in mark-to-market gains of Swire Pacific’s stake in Cathay Pacific increased from 39.97% HK$,08 million in 009 in respect of fuel hedging contracts to 4.97%. for the period 00 to 0. These gains reversed a large part of the substantial losses recorded in 008 in respect of fuel In October 009, Swire Pacific acquired an additional hedging contracts. .45% shareholding in HAECO from Cathay Pacific for a consideration of HK$,90 million. As a result, Swire Pacific’s Airline profit after tax for the year was HK$4,7 million, direct interest in HAECO increased from 33.5% to 45.96% compared to a loss of HK$8,40 million in 008. Passenger and Cathay Pacific’s direct interest in HAECO decreased from demand, in particular for premium class travel, was 7.45% to 5.00%. substantially reduced in the first three quarters of the year. Cargo demand was exceptionally weak in the first-half, Cathay Pacific Group reflecting global economic conditions. There was a recovery in cargo demand from October onwards, albeit from a low base. 2009 Results The Cathay Pacific group’s attributable profit was The Cathay Pacific group took a number of measures designed HK$4,694 million in 009, compared to a loss of HK$8,696 to address the significant reduction in business. Capacity, million in 008. Turnover for the year fell by .6% to operating costs and capital expenditure were reduced, an HK$66,978 million. unpaid leave scheme for staff was introduced, a number of aircraft were parked and deferral of aircraft deliveries and Swire Pacific Annual Report 009 7 Review of Operations | Aviation Division Network Coverage Cathay Pacific Cathay Pacific Freighter Dragonair Air Hong Kong Hong Kong 8 Swire Pacific Annual Report 009 Cathay Pacific Cathay Pacific Freighter Dragonair Air Hong Kong Hong Kong other concessions were requested from suppliers. Despite Cathay Pacific launched a new four-times-weekly service to these measures, the network was kept substantially intact and Jeddah in October and began a new codeshare service to Fiji the airlines went to great efforts to ensure that the quality of with Air Pacific in December. In May, Dragonair temporarily their product and service was not diminished and that the suspended services to Dalian, Fukuoka, Guilin, Shenyang, passenger experience was not compromised. Taichung and Xian. Dragonair launched a twice daily service to Guangzhou in September. Passenger Services Cathay Pacific and Dragonair The substantial increase in direct cross-Strait services between Cathay Pacific and Dragonair carried a total of 4.6 million Mainland China and Taiwan which started to take effect in passengers in 009, a decrease of .6% from 008. Capacity August had a significant impact on demand for travel from fell by 3.7% compared to 008 as a result of reduced Taiwan via Hong Kong. However, inbound business was more frequencies and the temporary suspension of operations to robust as a result of growing interest in Taiwan as a leisure six Dragonair destinations. The load factor for the year was destination for Hong Kong travellers. 80.5%, up .7 percentage points compared to 008. Passenger turnover fell by 0.8% to HK$45,90 million. Yield for the Cargo year decreased by 9.5% to HK¢5., principally reflecting Cathay Pacific and Dragonair weak demand from premium class travellers and competitive Demand for air cargo was substantially reduced as a result pressure on economy class yield. of the global economic downturn. All major markets were affected, particularly in the first half of the year, when the Swire Pacific Annual Report 009 9 Review of Operations | Aviation Division Dragonair provides connectivity to 17 cities in Mainland China. resultant drop in volumes put pressure on prices and therefore Fleet Size on yields and revenue. Demand improved from October Cathay Pacific and Dragonair onwards, albeit from a low base and this, combined with The total fleet size increased by one to 55. capacity reductions as the industry parked equipment, helped to increase load factors, yields and revenue. Cargo and mail Cathay Pacific took delivery of ten new aircraft, comprising tonnage carried by Cathay Pacific and Dragonair fell by 7.% five Boeing 777-300ER extended range passenger aircraft, four to ,57,948 tonnes compared to a capacity reduction of Boeing 747-400ERF extended range freighters and one Boeing 3.%. The load factor rose by 4.9 percentage points while 747-400BCF converted freighter. yield fell by 6.8%. Five Boeing 747-00F “Classic” freighters were retired in The freighter network was strengthened by the introduction of 009, bringing to an end the fleet’s 7 year history at Cathay a new service to Jakarta and Ho Chi Minh City in January 009 Pacific. The last Dragonair Classic left in January 009 and and a three-times-weekly service to Miami and Houston in the last Cathay Pacific Classic left in July. In response to the March 009. Three additional frequencies were added to the downturn in demand, a total of ten aircraft, comprising five Milan service in February 009. Boeing 747-400BCF converted freighters, one Boeing 747-400 passenger aircraft and four Airbus A340-300 passenger aircraft AHK Air Hong Kong (“AHK”) were withdrawn from service.